Credit Spread

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Credit Spread most often refers to an options strategy that sells one option and buys a cheaper option of the same type and expiration, collecting a net premium with capped risk. In fixed income, it is the yield gap between a corporate bond and a Treasury.

How an options credit spread works

A trader sells an option closer to the money and buys one further out of the money, receiving more premium than is paid. The net amount received is the credit. The purchased option caps the loss, so both maximum profit and maximum loss are known in advance.

  • Bull put spread: sell a higher-strike put, buy a lower-strike put. Profits if the stock stays above the short strike.
  • Bear call spread: sell a lower-strike call, buy a higher-strike call. Profits if the stock stays below the short strike.

Credit spread example

Suppose a stock trades at $100. You sell a $95 put for $2.00 and buy a $90 put for $0.80, both expiring in 30 days. Your net credit is $1.20, or $120 per spread.

  • Maximum profit: $120, if the stock is above $95 at expiration.
  • Maximum loss: the $5 strike width minus the credit, $3.80, or $380, if the stock ends below $90.
  • Breakeven: $95 minus $1.20, or $93.80.

The ratio of potential reward to risk in this example is about 1 to 3. Traders accept that unfavorable ratio because the short strike is out of the money, so the trade wins if the stock rises, stays flat or falls only modestly. The probability of profit is higher than for a debit trade, but a single large move can erase several winning trades. Choosing strike width, distance from the current price and position size together determines how a credit spread fits within an account's risk limits. Many traders close positions early, for example after capturing half of the credit, to reduce exposure to late surprises.

Credit spreads in the bond market

In fixed income, a credit spread is the extra yield a corporate bond pays over a Treasury of similar maturity. If a five-year corporate bond yields 6% and a comparable Treasury yields 4%, the spread is 2 percentage points, or 200 basis points. Spreads widen when investors worry about defaults, often heading into a recession, and narrow when confidence is high.

Credit spread vs debit spread

A credit spread collects premium and benefits from time decay; a debit spread pays premium and needs the stock to move. Both are types of vertical options spread. For the market-making meaning of the word, see the bid-ask spread.

Risks of options credit spreads

Credit spreads often win small amounts frequently and lose larger amounts occasionally, since the maximum loss usually exceeds the credit. Early assignment of the short leg, sharp gaps on news and wide bid-ask spreads on illiquid options can all hurt results. Brokers require margin approval equal to the defined risk.

Frequently asked questions

What is the maximum loss on a credit spread?

For an options credit spread, the maximum loss is the difference between the strikes minus the net credit received, multiplied by 100 shares per contract.

Why do bond credit spreads widen?

They widen when investors demand more compensation for default risk, which often happens during economic slowdowns or financial stress.

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For information only, not investment advice. See the disclaimer.